CROWDFUNDING: CHALLENGES AND ALTERNATIVES TO FINANCING THE INNOVATIVE ENTREPRENEURSHIP IN BRAZIL

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Myron Riley
7 years ago
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1 3rd Conference of the International Consortium of Studies on Innovation and Entrepreneurship (ICIER) Policies to Support Entrepreneurship November 21 and 22, Rio de Janeiro! CROWDFUNDING: CHALLENGES AND ALTERNATIVES TO FINANCING THE INNOVATIVE ENTREPRENEURSHIP IN BRAZIL! Marco Nascimento Policy Analyst for the Department of Innovation, Ministry of Health, Brazil, and Masters Candidate at the Graduate Program in Public Policy, Strategy, and Development, Institute of Economics, UFRJ. marco1405@gmail.com! Emanoel Querette MSc. in Public Policies for Science, Technology and Innovation and Doctoral Candidate at the Graduate Program in Public emanoelpolicy, Strategy, and Development, Institute of Economics, UFRJ. emanoelq@gmail.com

2 INTRODUCTION _ The occurrence of innovative enterprises is what drives technical progress and induces economic development. _ Capitalism as that kind of private property economy in which innovations are carried out by means of borrowed money (1939). _ Innovative enterprises face a series of difficulties when it comes to the external financing. _ The rate of entrepreneurship in Brazil is high, most of it out of working necessity. On the other hand, the supporting infrastructure to entrepreneurship is very fragile, with low levels of venture capital and severe funding shortage.

3 ! CHALLENGES TO FINANCING INOVATIVE ENTERPRISES _Surveys show accessing finance as the main factor of success and competitive bottleneck for the innovative enterprises. _ The innovative firm is marked by high risks and uncertainty, and intangible value, therefore, difficult economic evaluation, making hard to assess risk and appropriate cost of capital by financial institutions. _ Micro and small enterprises are very important to the economic and social reality of Brazil. _ In Brazil: credit market is more targeted to the consumer than to the producer, to short than to long term, and reaches more high than low income borrowers. _ Lack of collaterals; lack of documentation; service bureaucracy difficulties; negative bank records in suppliers credit reporting; short history in the financial system; and failure to meet the required guarantees. _ The situation regarding the supply of credit in Brazil is apparently improving, there is still plenty of room for other forms of enabling the achievement of projects

4 DIGITAL TECHNOLOGIES, USER ENGAGEMENT AND COLLABORATIVE FUNDING _ Transformation to the role of consumers and producers. _ Not only co-producers, but also play an active role in selecting, editing, re-combining and referencing digital production. _ Among these new roles that users occupy in the value chain is the role of financier. _ Collaborative culture, generated among software developer and consolidated by the Internet has surpassed the contexts that led to its emergence. _ Crowdsourcing, consecrated by Wired magazine (2006), encompasses most of these practices based on open content and collaborative networking, be it creating a computer program, a bike or a chain of real-time information about a specific event.

5 IMPACTS of DIGITAL TECHNOLOGY! Source: Pinder e Collins, 2010

6 TYPES OF CROWDFUNDING _ At least four basic models of crowdfunding: Donation (benfeitoria), Reward (kickstarter), Lending (kiva) and Equity (crowdcube). _ Main difference is in the type of reward the funders get in exchange for their contributions, which can vary from simply recognition and praise, to some form of gift, to a share in the project revenues or equity of the company. _ In November 2011, the Rushmore group successfully raised the sum of one million pounds sterling with the participation of 143 investors who have acquired 10 per cent of the company's equity. _ First American attempts had to be cancelled for lack of legal framework.

7 JOBS ACT _ In January 2011, the White House launched the Startup America Initiative, with the main objective of increasing the success rate of new ventures (start-ups). _ The Jumpstart Our Business Act (JOBS Act) was designed, which included the possibility of collaborative funding based on equity participation. _ Fear of deregulation. _ Delicate trade off.

8 OPPORTUNITIES AND CHALLENGES OF CROWDFUNDING FOR INNOVATIVE FINANCING _ If equity crowdfunding comes to be at least a fragment of what most advocates believe it can be, it would mean a significant increase in the number of ideas being proposed, which should mean a proportional increase in the number of successful endeavors as well an equally larger number of failures. _ Hard to imagine this models development without some contribution from the state. This can be a complicating factor because crowdfunding is imbued with a certain spirit of independence and absence of intermediaries. _ New Zealand s government is using crowdfunding in cultural projects. _ Love money dependent entrepreneurship results in a social restriction. _ Angels and venture capitalists tend to seek opportunities for high risk and high return. _ Entrepreneurs benefit from insights, knowledge, suggestions and comments; the fundraising process may serve as a market pre-test, resulting in improvements to the design (be it of a product or a service) even before launching. _ Building up a network/ community of engaged users, who might act as advocates for the product and even distribute and publicize it in their own social networks. _ Shift from a mass production model to suit the personal production trend.

9 CONCLUSION Opportunities arising from the implementation of crowdfunding in Brazil may include the establishment of hybrid models with a broader social appeal, driving citizen engagement, and resulting in stimulating entrepreneurship through the support of a community. And if the predicted age of mass customisation and personal manufacturing come to be, crowdfunding may be an effective way of financing the kind of micro-businesses and entrepreneurs that will drive such movement.

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